Did you ever wonder how investment brokerages make money? With many claiming low or no fees, how do they stay in business? Wealthsimple has become a staple in many Canadians investing portfolios with its original robo-advisor platform, Wealthsimple Invest.
When the company launched Wealthsimple Trade in 2019 and introduced zero-commission trading, the bar was set even higher for its competitors.
But touting these no fees and no account minimums only leads to one question – how does the company make any money?
Wealthsimple Trade makes money on its currency conversion fee. In addition, the bid-ask spread accounts for even more profits for the investing giant. Let’s break down each charge for a clear view of how Wealthsimple brings in the cash without charging its customers’ commission trading fees.
Is Wealthsimple Trade Really Free?
Wealthsimple Trade has a lot going for it. As Canada’s first commission-free trading platform, it’s a great choice for beginning investors or those looking for socially responsible investment options. However, no brokerage house is ever really free.
Currency Conversion Fee
While investors can buy and sell stocks on the TSX (Toronto Stock Exchange), if you choose to invest in the U.S. market, either on the NASDAQ or NYSE, Wealthsimple charges a currency conversion fee.
The conversion fee is 1.5% and is charged each time you buy or sell a U.S. denominated asset. The following example depicts how the conversion fee works while factoring in the foreign exchange rate.
When you buy a stock, it’s for the ask price – the lowest price someone is willing to sell it for. Conversely, when selling a stock, it’s for the bid price – the highest price someone is willing to pay for it.
The difference between these two prices is referred to as the bid-ask spread. That difference is collected by the brokerage firm, and although it might be small, over the course of thousands of transactions, it adds up and fattens Wealthsimple’s bottom line.
Wealthsimple Trade Plus Subscription
The company will also have a Wealthsimple Trade Plus subscription, where they will earn money from all subscribers to the program. This will give access to features such as a USD account, and instant deposits of up to $5,000.
Wealthsimple really offers two different investing platforms – one that allows investors active participation – that’s Wealthsimple Trade, and the other that automatically invests your money for you – that’s Wealthsimple Invest.
As noted above, Wealthsimple Trade is great for beginning investors and offers zero-commission trades. Wealthsimple Invest is geared for those looking to enter the stock market without the headaches of managing their own portfolio.
Instead, based on a survey of your investing goals and risk tolerance, Wealthsimple Invest provides a diversified portfolio based on your answers, making it easy to start investing without any hassle.
While there are no charges for deposits, withdrawals, or monthly fees, Wealthsimple Invest does charge a management fee. The fee depends on which of the three plans you invest in.
In addition to the three portfolios mentioned above, Wealthsimple Invest also provides a Halal and socially responsible portfolioa. According to their website, the Halal portfolio is meant for investors that comply with Islamic law, meaning:
- Investments regularly screened by Shariah scholars
- There are no investments in companies that make a profit from gambling, tobacco, or other restricted businesses.
- The portfolio follows Islamic laws and guidance but does not lack performance levels.
Another way Wealthsimple Invest sets itself apart from competitors is its socially responsible fund. The company invests users’ money into EFTs that are screened based on their environmental and social impact. That means they look for companies with a low carbon footprint and a diverse board of directors.
While the management fees for these portfolios are the same as the ones above, additional fees charged by the firms that manage the EFTs of these portfolios are slightly higher (as someone qualified is needed to screen for the most socially responsible companies).
Wealthsimple Invest collects a portion of these additional fees as another way to add to its bottom line.
How Does Wealthsimple Make Money on Crypto?
With the success of Wealthsimple Trade, the platform extended its options into the cryptocurrency market in 2020. Now, investors can buy Bitcoin and Ethereum without paying commissions.
One of the advantages of this account is that investors don’t have to have their own digital wallets. This makes it easy for beginners to start investing in cryptocurrency. Coins that are bought and sold are all held inside your own Crypto account.
While this might be a plus to some, it’s a drawback to others. Instead of moving coins to your own digital wallet, the only choice is to convert your coins to Canadian dollars.
And just like stock investments included in Wealthsimple Trade, Wealthsimple Crypto doesn’t include commissions when buying or selling the digital currency. But that doesn’t mean the company isn’t making money off your transactions.
The company claims profits on cryptocurrency are due to the price spread, (aka the current price to buy vs the higher transaction price). The difference between the two includes the fees garnered by Wealthsimple.
These trading spreads are available through the Wealthsimple app and are around 1.5-2% per transaction. The following example showcases how the operation fees are applied.
So while Wealthsimple can claim zero commission trading fees, they still make money based on currency conversion, bid-ask spread, operation, and management fees.
Throughout Wealthsimples array of products, there are many fees and charges that don’t seem to add up to much money. However, when taken over the course of time and with the platforms’ many users, those “small fees” add up to large profits. Here are other ways Wealthsimple makes out.
By offering a high-yield savings account, investors make out. That might be the case, but Wealthsimple makes a profit as well. The company can pay out its investor’s interest because it lends cash out to other institutions.
These institutions (banks and businesses) pay interest back to Wealthsimple at interest rates higher than the company needs to dole out to its investors.
Just recently, Wealthsimple launched a new debit card in cooperation with Visa. The card allows users to access money or pay at merchants throughout the world. Whenever you use the card, an interchange fee is applied.
The merchant collects the fee, and they must split the revenue between Visa and Wealthsimple.
In May 2021, Wealthsimple’s valuation topped $4 billion, triple what it was worth the previous year. With the demand increasing for online trading platforms, offering commission-free trading, as well as cryptocurrency, makes Wealthsimple an attractive option.
The company credits its valuation surge due to its array of product options, specifically, its investment trading platform. Growth during the pandemic is a likely reason the valuation soared. Currently, the company has over 2 million users and is looking to continue to grow its product line.
While investment platforms can offer low or no fees as part of their marketing plan, there have to be some ways the brokerage is making money or they’d be out of business.
Here’s an in-depth review I did on the Wealthsimple Trade platform.
While Wealthsimple is a great platform for beginning investors and is even more inviting with their zero-commission trades, there are certain charges associated with them that go directly to their bottom line.
If you’re looking to start investing, check out these tips for beginners.